Classics Readings - Strategisch
Management
Topic 1
Porter: ‘What is Strategy?’
I. Operational effectiveness is not strategy
Positioning - once the heart of strategy - became way to static for today’s dynamic markets
and changing technologies
● Companies must be flexible to respond rapidly to competition
● Companies must benchmark continuously
● Companies must outsource aggressively
● Companies must nurture
● …
→ Rivals can quickly copy market positions and competitive advantage is temporary
The root of the problem: failure to distinguish between operational effectiveness and
strategy.
→ Both essential to superior performance, but they work in very different ways
Operational effectiveness: performing similar activities better than rivals perform them. It
includes, but is not limited to efficiency. It refers to any number of practices that allow a
company to better utilize its inputs by, for example, reducing defects or developing better
products faster.
→ Differences in OE (due to elimination of wasted effort, more employees, more advanced
technology,...) are a source of differences in profitability because they affect relative cost
positions and levels of differentiation
Strategic positioning: performing different activities from rivals’ or performing similar activities
in different ways.
Imagine a productivity frontier
→ Constitutes the sum of all existing best practices at
any given time.
→ When a company improves its OE, it moves toward
the frontier.
OE is necessary to achieve superior profitability.
However, it is not usually sufficient.
→ Staying ahead of rivals gets harder every day
,OE competition shifts the productivity frontier outward
→ It leads to relative improvement for no one.
Reasons:
1. The rapid diffusion of best practices
→ due to the imitation of management techniques, new technologies, input
improvements,...
2. Competitive convergence
The more benchmarking companies do, the more they look alike. The more that
rivals outsource activities, the more generic those activities become.
→ strategies converge and competition becomes a series of races down identical
paths that no one can win
II. Strategy rests on unique activities
Competitive strategy is about being different.
→ Choosing a different set of activities to deliver a unique mix of value.
The essence of strategy is in the activities - choosing to perform activities differently or to
perform different activities than rivals.
f.e. Ikea: Low-cost position from having customers “do it themselves”
f.e. Southwest Airline: tailors all its activities to deliver low-cost, convenient service.
The origins of strategic positions
→ Three distinct sources
1) Variety-based positioning: positioning can be based producing a subset of an
industry’s products or service
→ Makes sense when a company can best produce particular products using
distinctive sets of activities
f.e. Jiffy Lube International: specializes in automotive lubricants and does not offer
services.
2) Needs-based positioning: serving most or all the needs of a particular group of
customers
→ Arises when there are groups of customers with differing needs, and when a
tailored set of activities can serve those needs
f.e. IKEA: seeks to meet all the home furnishing needs of its target customers, not
just a subset of them.
3) Access-based positioning: segmenting customers who are accessible in different
ways.
, f.e. Carmike Cinemas: operates movie theaters exclusively in cities with populations
under 200,000. How does Carmike make money in markets that are not only small
but also won’t support big-city price tickets?
→ A set of activities that result in a lean cost structure: small-town customers can be
served through standardized, low-cost theater complexes
A position emerging from any of the sources can be broad or narrow, but whatever the basis,
positioning requires a tailored set of activities because it is always a function of differences
on the supply side
Having defined positioning, we can now begin to answer “What is strategy?”
Strategy = The creation of a unique and valuable position, involving a different set of
activities. The essence of strategic positioning is to choose activities that are different from
rivals
If the same set of activities were best to produce all varieties, meet all needs and access all
customers, companies could easily shift among them and operational effectiveness would
determine performance.
III. A sustainable strategic position requires trade-offs
Choosing a unique position is not enough to guarantee a sustainable advantage.
A valuable position will attract imitation by incumbents, who are likely to copy it in one of two
ways:
1) Repositioning: The competitor can reposition itself to match the superior performer
2) Straddling: The straddler seeks to match the benefits of a successful position while
maintaining its existing position
But, a strategic position is not sustainable unless there are trade-offs with other positions.
→ Trade-offs create the need for choice and protect against repositioners and straddlers
Trade-offs arise for 3 reasons:
1) Inconsistencies in image or reputation: A company known for delivering one kind
of value may lack credibility and confuse customers if it delivers another kind of value
→ Efforts to create a new image costs a lot
→ A powerful barrier to imitation
2) The activities themselves: Different positions require different product
configurations, different equipment, different employee behavior, different skills, and
different management systems. Many trade-offs reflect inflexibilities in machinery,
people, systems.
3) Limits on internal coordination and control: By clearly choosing to compete in
one way, management makes organizational priorities clear. Companies that try to be
all things to all customers risk confusion in the trenches as employees attempt to
make day-to-day operating decisions without a clear framework
, Positioning trade-offs are pervasive in competition and essential to strategy. They create the
need for choice and purposefully limit what a company offers.
They deter straddling or repositioning, because competitors that engage in those
approaches undermine their strategies and degrade the value of their existing activities
If there are no trade-offs, companies will never achieve a sustainable advantage.
Having defined the importance of trade-offs, we can now add a new dimension to “What is
strategy?”
Strategy = making trade-offs in competing. The essence of strategy is choosing what not to
do. Without trade-offs, there would be no need for choice and thus no need for strategy
IV. Fit drives both competitive advantage and sustainability
Strategy is about combining activities: “How do activities relate to one another?”
→ Competitive advantage comes from the way activities fit and reinforce one another
Fit locks out imitators by creating a chain that is as strong as its strongest link.
Types of fit
1) Simple consistency between each activity and the overall strategy.
→ Consistency ensures that the competitive advantages cumulate and do not cancel
themselves out.
→ It makes strategy easier to communicate to customers, employees and
shareholders
2) Activities are reinforcing
3) Optimization of effort
Competitive advantage grows out of the entire system of activities. The fit among activities
substantially reduces cost or increases differentiation. Beyond that, the competitive value of
individual activities –or the associated skills, competencies, or resources –cannot be
decoupled from the system or the strategy.
Strategy: creating fit among a company’s activities.
V. Rediscovering Strategy
Why do so many companies fail to have a strategy?
- The failure to choose: managers have become confused about the necessity to make
choices. When companies operate far from the productivity frontier, trade-offs appear
unnecessary.
